Mortgages Blog

Rates fall on debt ceiling deal

Congress finally got its act together and ended the shutdown and avoided default -- at least for now.

The agreement is a temporary measure that delays the issue rather than fixes it. It's more like a fiscal Band-Aid, but it's better than nothing.

Republicans and Democrats have agreed to fund the government through Jan. 15 and to raise the debt ceiling until Feb. 7.

If lawmakers had allowed the federal government to default on its financial obligations, the economy, the housing market and mortgage borrowers would have taken a big hit, economists and housing advocates say.

Which direction will mortgage rates move?

The deal seems to have pushed mortgage rates down this morning, which surprised some market observers.

Paul Edelstein, director of financial economics at IHS Global Insight, had expected a rally in the stock market and a slight increase in long-term U.S. Treasury yields after lawmakers reached an agreement. Normally, higher yields result in higher mortgage rates.

But investors don't seem convinced that the federal government has its finances under control yet. U.S. stocks dropped this morning, and yields on the 10-year Treasury note dropped to 2.6 percent. It was about 2.67 on Wednesday.

WTFY? (Why the falling yields?)

"I'm not entirely sure why the bond market is reacting this way," Edelstein says. "Markets may be reacting to initial claims, which fell less than expected. Possibly, relief over the debt ceiling is giving way to the realization that another fiscal showdown is coming in a few months."

Edeslstein is referring to the number of claims for unemployment benefits filed last week, which was released by the Labor Department this morning. Claims fell 15,000 to a seasonally adjusted 358,000, less than economists had expected. The report is the first economic indicator released since the government reopened this morning.

Apres le shutdown, le deluge

A series of other economic reports will soon be released, now that the government is functional again. Uncertainty about what these reports will say may be helping keep rates down for now, says Michael Becker, a mortgage banker for WCS Funding Group in Baltimore. Becker also had expected rates to rise after the deal.

"Rates are a lot better today," he says. "I didn't expect this."

This latest government agreement also puts pressure on the Federal Reserve to continue its bond-purchasing economic stimulus, which helps to keep a lid on mortgage rates.

"The Fed could be part of this," Edelstein says. "It's unlikely that they will taper later this year given yesterday's agreement."

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